Week in Review December 9, 2016

After taking a minor pause the previous week, the Donald Trump rally kicked into higher gear last week, with stocks registering their second biggest gains since the election.

All three major U.S. equity indexes gained more than 3% on the week, closing Friday at or near all-time highs. The Dow ended at 19757, just 1.2% short of reaching 20000. It passed 19000 less than three weeks ago. The index is up more than 13% so far this year. But small-cap stocks continued to outperform the big cap indexes. The Russell 2000 gained 5.6% last week, boosting its year-to-date increase to nearly 22%. The index is up more than 16% since Election Day.

European stocks had their best week of the year, as the markets largely brushed off the Italian referendum, while the European Central Bank said it would continue its asset-purchase program until the end of next year. Italian voters resoundingly defeated a constitutional reform measure that led Prime Minister Matteo Renzi to resign and which could further imperil the country’s banks, but the market reaction was muted, unlike the reaction to the Brexit vote back in June. Then on Thursday the ECB said it would continue its monthly purchases of sovereign and corporate bonds, if at a reduced rate. ECB President Mario Draghi was quick to dismiss the idea of a taper. “Tapering has not been discussed today,” he said. “The presence of the ECB on the markets will be there for a long time,” adding that the bank would increase purchases if the need arose. The program was originally set to expire in March. The decision drove down the value of the euro, which ended the week at about $1.05, after climbing to $1.08 shortly before the announcement. The Stoxx Europe 600 ended the week with a 4.7% gain, while Germany’s DAX index jumped 6.6%. Italian stocks climbed more than 7%.

The Federal Reserve holds its last meeting of the year this week, at which it’s likely to raise interest rates for the first time in a year. A rate increase is almost a forgone conclusion, with the three-month Treasury bill trading last week at 0.55%, more than double the Fed’s zero to 0.25% federal funds range. Bond yields continued to rise last week, with yields at the long-end of the Treasury curve rising about nine basis points on the week. The benchmark 10-year note closed at 2.47%, its highest level since June 2015. The yield has risen more than 65 basis points since Election Day and 110 bps since July.

There was a thin supply of U.S. economic reports, but they were all positive, continuing a recent uptrend. The Institute for Supply Management’s non-manufacturing index rose nearly three points to 57.2, its highest reading in 13 months and well above expectations. October factory orders rose 2.7%. The University of Michigan said its consumer sentiment index jumped nearly four points in early December to 98, well above expectations, while its current conditions index rose almost five points to 112.1, its highest point since 2005, well before the global financial crisis. Unemployment claims fell by 10,000 to 258,000 for the most recent week.

Reports/dates/facts/links worth paying attention to over the next week: